Dollar at High Risk of a Bearish Break but Lack of Risk Prevents Trend

Blind volatility was given direction through the end of this past week, and it was aimed at driving the dollar lower. The world’s reserve currency dropped against all its major counterparts with the exception of the Japanese yen and racked up a sizable 1.7 percent drop against the Euro. The responsibility for this move can be split between the drive following the NFPs release and the general buoyancy in risk appetite trends (itself bolstered by the jobs data). The labor statistics were superficially encouraging with a 163,000-job reading that represented the first better-than-expected reading in five months. Yet, the uptick in unemployment brings us back to reality when it comes to the underlying trend for economic activity. The next phase for the greenback will fall to underlying risk trends. With the S&P 500 at three-month highs and the Dollar Index on the verge of breaking a year-long bull trend, a volatile anti-dollar push is likely. But follow through on risk appetite remains an insurmountable hurdle.

Euro Rallies Through the Close as Market Takes Draghi Bait

There were few more impressive moves this past week than the Euro’s surge through Friday. The climb was market wide and the EURUSD’s 200-plus pip rally was the second biggest for the benchmark pair in nine months (outpaced slightly by the June 29 surge – that notably preceded a leg lower that eventually drove the pair to two-year lows). We will start Monday off at a month high and bulls will be brimming with optimism that the shared currency can shrug off the constant fear surrounding the region’s financial troubles and carry out a hearty reversal against both safe havens (EURUSD) and high-yield counterparts (EURAUD) alike. However, enthusiasm doesn’t generate trends. The euro’s performance through this past week should instill a sense of skepticism in the fundamental trader. It was the previous week’s exuberant hope that ECB President Draghi was prepared to lead the central bank to a rescue independent of EZ bureaucracy that started the currency’s turn. Reality came crashing when he didn’t deliver at the ECB policy decision. The President said on Friday that the ECB would act to buy Spanish and Italian bonds if the EFSF was activated to do the same. Once again, the ball is back in the EZ’ court. Meanwhile, Draghi managed to buy more time.

British Pound Will Absorb BoE’s Updated Growth Forecasts Next Week

The greatest threat to the UK economy and financial system is the debt crisis in the Euro Zone. That is the warning that policy officials have repeated on a regular basis, and it was an important factor in the NIESR’s forecast for a 0.5 percent contraction in GDP through 2012 along with their projection that Osborne will miss the budget deficit target for the fiscal year. That said, the euro seemed particularly optimistic through the end of this past week, lifting a considerable weight from the sterling’s shoulders (even if it is temporary). That said, the pound closed this past week weaker against all its counterparts. Risk appetite trends and the Euro situation certainly factor in; but even when they are lifted, the sterling must still deal with its lackluster domestic trajectory. That said, the BoE’s Inflation Report on Wednesday should give interesting updates.

Australian Dollar: An RBA Hold Could Leverage a Risk Rebound

This past week, the Australian dollar climbed against all but the kiwi as the rise in risk appetite trends proved the most prolific fundamental development through the period (the Euro’s retreat from crisis is under greater scrutiny and only really took traction through the final 48 hours of the trading week). Taking stock of ‘risk’, we see that AUDUSD has scaled approximately 1000 pips since the beginning of June and ended Friday at a four-and-half-month high. That is a good position to be in heading into next week’s RBA rate decision. While the policy meeting is unlikely to offer any material change from the cautious hold Governor Stevens and crew offered last go around, a second hold from the group will further alleviate future expectations for cuts. The 12mth forecast through swaps is currently 75 bps, nearly the least bearish in four months.

Canadian Dollar Free to Respond to Labor Data Unencumbered

The Canadian dollar visibly struggled through Friday’s session. Though the currency posted gains against the funding / safe haven currencies (dollar and yen), it notably trailed the Euro group and fellow investment currencies. That is an interesting outcome considering the session’s top data (US NFPs) supports export strength on the surface; while the unconvincing appetite for risk bolsters the case for a ‘safer’, high-yielding currency like the loonie. In the relatively light global economic calendar ahead, the Canadian docket stands out. Manufacturing, housing and trade data offer a broad view of the economy. However, it is Friday’s employment statistics for July that offer the best volatility response.

The Bank of Japan is expected to deliver its monetary policy assessment this coming Friday. And, markets likely expect absolutely nothing to come of the meeting. Japanese officials (both at the government and central bank level) have clearly struggled in their efforts to influence the yen exchange rate, but it remains one of their top concerns (not surprising given Japan’s dependence on exports). Until US officials start to raise rates once again and/or demand for higher risk positions regains serious traction, neither USDJPY nor the other yen crosses are likely to produce natural buoyancy. That leaves policy officials to fight a fruitless battle of intervention and verbal manipulation. This past week, Azumi cut one of the few options still available: allowing the BoJ to purchase foreign bonds in scale. The central bank has no recourse – hence the threats.

Gold Implied Volatility Plunges, Risk Seemingly Evaporates

As remarkable as gold’s advance and break from multi-month congestion a week ago, the precious metal completely lost its bullish impetus through the final 48 hours of trading this past active trading period. The safe haven aspect of the commodity didn’t pan out through the slide or rise in speculative interests, so it is unlikely to have little bearing moving forward. The anti-dollar factor on the other hand will play an important role on bearing. Considering the precious metal is typically priced in the reserve currency, the greenback’s own concerns with turning its trend present a considerable opportunity for gold. That being said, if the prospect for dollar selling is rather limited; gold would need to find another active driver to supplement its appeal for progress. Considering the Fed has offered no prospect for QE3 and Draghi has said the SMP activation depends on EFSF purchases, the anti-fiat aspect will struggle. Meanwhile the CBOE’s Gold Volatility Index plunged this past week from 20 percent to a three-month low 16.7 percent. Gold traders don’t seem to expect a breakout with trend potential anytime soon.